Much talk this week likely spurred on by Mark Carney and his proclamation that the recession is over.  Many clients and business partners have asked me whether this can be true or if he has another agenda.  Certainly the contrarians out there like Garth Turner and his blog dogs have taken particular exception to Mr. Carney’s words.

Today I read an economic summary from Avery Shenfeld which I thought was interesting and topical to this ongoing debate as to whether we are in a recovery.

He essentially believes that whether we are in a recovery or not depends on who you are.  For instance if you are a stock market investor then the recovery is when you are starting to get your money back, and that happened essentially in March.  With typical corrections obviously still to come the investor will still see gains continue for some time.  This makes sense from another perspective as historically stock markets are a leading indicator of both entering and exiting a recession.

However, if you are an economist, and this is where Mr. Carney is, then you will not call a recovery until positive GDP growth starts to happen, and not just for one quarter but that there is a trend.  In the US it is largely accepted that we will cross that line this summer.  Before the contrarians out there jump on this saying it is impossible to see growth absent of any real increase in demand, you must factor in that the first half of this year so massive cuts to production, which resulted in significant depleted inventories.  Even with marginal demand increase there will be marginal positive growth.  Canada will see growth then as US company ramp up stocking the shelves and warehouses then Canadian exporters will see their order basket fill up.

Finally, according to Shenfeld the average Joe Canadian will not declare we are in a recovery until they start getting their jobs back. Shenfeld then goes on to predict that this is a longer road then we would like.  Even if GDP growth bounces back as we predicted above.  He contends that US and Canadian consumers are still licking their wounds from earlier wealth losses and will take some time to unlock their wallets.  As well businesses are horading cash instead of buying equipment etc.

Although I agree with Shenfeld technically, I disagree that consumers, as a whole, will take longer to get out and feel confident again.  Employment participation, especially in Alberta where it tops the nation, is still very high and even if unemployment sadly tops 9% nationally there is still a significant number of people employed.  Secondly, as Avery’s colleague Benjamin Tal pointed out in his recent road show across the country in this nasty recession we saw an interesting but significant difference from any previous recession and that is the number of business bankruptcies were barely a blip and the significant number of women in the workforce.

His theory was that in past recessions unemployment was more damaging as employers “went out of business” in this recession most just were “laid off”.  Therefore the hypotheses suggests that it will be easier for businesses to callback their employees then it would be to start the business all over again.

The theory behind more women in the workforce this time around was that in many situations when one spouse lost their job the other was still working, which although difficult made it manageable for many people to weather the storm, and thus will make it quicker for them to rebound.

There is a silver lining in Shenfelds theory if you want to believe it.  If the recovery takes longer to grab hold of the average Joe, then count on more government stimulus to prod them, and for certain a delay in interest rate hikes from the bank of Canada.  Mr. Carney can NOT hike rates until the average Canadian is out spending again.  This bodes well for the real estate market, and particularly in Alberta.  Why?  because of the blessing in Western Canada of natural resources which will be the number one demand item in the global recovery.

Comments?

Once again Garth has attacked an innocent person who has come to ask him a reasonable question.  Check out the post here

In this comment “Third, what the hell is wrong with having no property, no debt, and $800,000 in cash?” he once again is discouraging people from buying a home, yet he has bought I think four homes in the recent past?

Anyway, how about this as an alternative strategy?

Buy the home for $900,00 and put $400,000 down. There are two ways to analyze this.

1) Value of buying this home today versus a year ago

I’m assuming this home is down 15% versus one year ago. (If people know the real data on this please comment and I will fix.)

2009 Price = $900,000                                     2008 Price = $1,035,000               -15%

2009 Mortgage rate (5 year fixed) = 4.39%   2008 Mortgage Rate = 5.65%        -29%

2009 Down Payment = 44% or $400,000  2008 Down Payment = 44% or $460,000   -15%

Amortization 25 Years in both cases

2009 Mortgage Payment = $2,736.87             2008 Mortgage Payment = $3,560.12     -30%

Mortgage balance at end of term:

2009 case = $438,178.33                                   2008 case = $513,966.53         -17%

she will be ahead by $513,966.53 – $438, 178.33 = $75,787.50 then she would have been by buying a year ago. There is the $50,000 she was lamenting about losing by selling too early and then some.

2) Velocity of Money Strategy

With the balance she has remaining ($400,000) after her down payment she could invest in Garth’s bank preferred shares option at 7% annual rate of return.

At the end of five years her investment account will have: $564,239.50 for a profit of $164,239.50.  After tax at say 35% she has $105,113 to protect her net worth against any drops in her home value.

This is where the opinions will run wild, here is mine:

If Garth and his army of doomsayers are correct and over the next five years her real estate will drop in value, then the first 19% drop is protected by her gains in her investment account $105,113 and the equity she has built up by her principal reduction 0f approx. $62,000. ($105,113 + $62,000)/$900,000

I for one believe that over the course of five years she will see a moderate increase or at worst flat.  Why?  Housing has always grown with incomes (except when they temporarily overshoot income, causing the market corrections that we have seen).  Incomes in BC, in my opinion, will likely rise moderately as the west coast is set up well in the recovery therefore her home value net should rise moderately in my OPINION.

Therefore if at worst her property increase is flat her net worth will have risen by the equity she built (principal repayment on her loan of approx. $62,000 and her investment account balance of $105,113 = $167,113).

Compare this to Garth Turner’s advice.

Rent and invest her money.

Investment ($800,000 at 7% annual rate of return) = $1,128,479.01.  Profit = $328,479.01 after tax (35%) = $213,511.36

Lost rent money= This is tough as I don’t know what her rent is right now?  What is reasonable in Vancouver to compare living in her $900,000 home?  I don’t know let’s say this one.

Therefore her rent at $3,600 per month X 60 = $43,200 GONE.

Therefore her net worth with Garth’s advice = $213,511.36 – $43,200 = $170,311.36

Conclusion:

There is a million ways to likely analyze this but you may say

“Yes, but garth’s advice has less risk against the catastrophic drop in property values we believe will happen”

I can’t combat this one, we will have to agree to disagree on this point.  Keep in mind I never put in ANY property appreciation over the next five years in my example, what if we see a moderate increase of 2% per year? There would be an additional $94,000 added to her net worth.

My final point is that Garth Turner ALWAYS discounts the intangible value of living in your own home, even though he is in his own home.

In my OPINION MOST rental homes are not located in the best areas, and are often not the best kept homes.  Those that are, typically cost MORE per month in rent then what you could pay in a mortgage payment for a comparable home in the area because they can get a premuium rent for obvious reasons.

So why not encourage people to live in their own nice comfortable home in a good area for a committed period of at least five years or more (property flippers deserve the pain they get when caught in a correction, because they take risk and can profit in a boom) as long as they think it through:

1) don’t get caught up in the hype of competitive offers and overpay

2) work with a mortgage professional who will design a personalized mortgage strategy to protect you and that will complement your overall financial wellness.

….Taking a deep breath and ready for the Garth followers…sigh